World Bank sees end to Russia capital flight after poll

Reuters News
Posted: Jan 17, 2012 9:34 AM
World Bank sees end to Russia capital flight after poll

By Lidia Kelly

MOSCOW (Reuters) - Capital flight from Russia, which last year was second only in post-Soviet times to outflows in the crisis year of 2008, should reverse once political stability returns after the March presidential election, the World Bank says.

Nearly half of $84.2 billion in capital outflows last year occurred in the fourth quarter before and after the December 4 parliamentary election which was won by Prime Minister Vladimir Putin's United Russia party but sparked mass demonstrations against alleged vote-rigging and calls for a re-run.

"In a period of perceived instability and an election period, it often happens that capital outflows intensify," Michal Rutkowski, the World Bank's newly appointed country director for Russia, told Reuters in an interview.

"Once the elections are over, I think this trend will be over."

Relatively high yields on Russian assets and a commodity-exporting economy that is growing by around 4 percent a year make Russia attractive to investors but political tension has created risk.

Political tensions deepened in September after Prime Minister Vladimir Putin and President Dmitry Medvedev announced a job swap that could potentially keep Putin in power for another 12 years.

Public discontent since last month's election has been the highest since Putin was first elected President in 1999.

Rutkowski, who has been with the World Bank for most of the past two decades, said the demonstrations were a sign of change in Russia.

"I would see it as proof of the emergence of a responsible civil society and, in this sense, the events show a maturity of the country," Rutkowski said.


Putin is still expected to win the March presidential poll by a comfortable margin, but Rutkowski said his government would need to implement tough reforms.

"After elections governments worldwide become more ready to take decisions, and we would hope for the same in the Russian Federation," he said.

"There are certain decisions that need to be taken that are not popular, for instance changes to the pension system to improve the sustainability of the pension system ... almost any change one could think of has to include the increase in the retirement age."

Russia's pension system, which allows men to retire at 60 and women at 55, is heavily subsidized by the state, pressuring government finances and threatening to widen a budget deficit which the government is trying to eliminate.

The economic ministry envisages a budget deficit of 0.6 percent of gross domestic product this year, assuming the average price of oil, Russia's chief export, at $100 per barrel. Government plans call for balancing the budget by 2015.

The government will also need to introduce a series of structural reforms to improve the business environment - often cited by investors as the main reason to stay away from Russia, Rutkowski said.

"Russia would like to attract responsible long-term investors and here, in order to achieve this, Russia should improve the investment climate by reducing lengthy and onerous procedures, and improving the ease of doing business for both existing businesses and new entrants," he said.

Russia drew $48.5 billion in foreign direct investment last year, according to central bank data. That was a quarter of the FDI flows that China saw in 2010 and $5 billion less than Brazil, according to figures from the Organisation for Economic Cooperation and Development. OECD data for 2011 was not available.

(Reporting by Lidia Kelly; Editing by Susan Fenton)